New Dividend Paying Position - Wal-Mart

Written by The Dividend Guy on June 10, 2006

After some in-depth research, I have decided to take a position in Wal-Mart. My views are summarized by a still growing business, a company that will not be hit as hard should we see a recession (note: I have no idea if we will have one or not), and an ever growing dividend. So without further ado, here is why I am buying WMT (and NOT suggesting you do the same without your own research):

Revenue:

Compound Growth Rate (1996 - 2006): 13.4%
Compound Growth Rate (2002 - 2006): 9.1%
Compound Growth Rate (2005-2006): 9.5%

Although revenue growth has slowed since 1996, the firm is still growing revenues at a good pace. The lowest period of growth was 2003 - 2006 when the company’s revenue grow 8.8%. Still not too bad. According to Value Line and other research, Wal-Mart is on a international growth kick which should provide opportunities for additional revenue growth.

Based on various growth rates through various time periods, I have estimated the revenue growth rate to 2011 to be 10% - which would put revenue at $504,629 million (Man that is a big number - that is $1,382,545,205 in revenue per day).

EPS:

Wal-Mart has done an incredible job growing its EPS consistently:

Compound Growth Rate (1996 - 2006): 16.5%
Compound Growth Rate (2002 - 2006): 15.6%
Compound Growth Rate (2005-2006): 10.4%

To estimate the EPS growth rates I try to use as many sources as possible. Here are the estimated that I was able to dig up:

MSN: 13%
Value Line: 12.5%
Morningstar: 13.2%

The number I chose to input was 12.5% for two reasons; to be conservative to the other estimates and I feel it reflects the more recent growth rate but provides a bit of an upside. Plugging in these numbers, I get a projected EPS of $4.79 in 2011.

Price:

If you remember when I discussed Pfizer, I look at price in terms of the historical P/E ratio compared to the current P/E ratio in order to estimate a future P/E ratio.

The overall average P/E going back to 1996 for WMT is 28.3. Like many stocks during the 1999 - 2001/2 period stocks had super high P/E’s and I think that must be factored out of the average P/E ratio somewhat. To help, I also looked at some estimates; MSN = 16.9, Morningstar = 17. With this information in hand I projected an upside P/E of 17 to be conservative. It is higher than the most recent P/E but something that I think is attainable.

Return:

When I look at return, the software package that I use provides me with an estimated upside rate of return, based on my previous inputs. It is also where I am able to see the dividend trend. In the case of Wal-Mart, they have increased their dividend 20.5% since 1996 - really good. With an estimated 1.4% dividend yield if I purchase now, my projected rate of return is 12.9%. Considering that I strive for a minimum of 12 % this is fits the bill.

Risk:

Using a potential decline of 30% in the price of the stock, I can hope for a $2.43 of reward for every $1.00 of risk. Remember from my Pfizer post, anything above $3 is wicked, anything above $2 is worth investing in (IMHO).

There you have it - my rationale for purchasing WMT. I have good hopes form WMT and plan on holding this stock for a long time.

NOTE: THIS IS NOT A RECOMMENDATION TO BUY. DO YOUR OWN RESEARCH. THESE ARE MY OPINIONS AND SHOULD NOT BE CONSTRUUDE AS INVESTMENT ADVISE.


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4 Comments so far

  1. Canadian Capitalist » Carnival of Investing # 26 June 11, 2006 10:27 pm

    […] New Dividend Paying Position - Wal-Mart: The Dividend Guy tells us why he initiated a position in the beast of Bentonville. […]

  2. Tim MMF June 12, 2006 3:38 pm

    Looks like good analysis. Where was the stock price sitting when you purchased your shares?

  3. Hejustlaughs June 12, 2006 11:01 pm

    Thanks for the recommendation to buy. I’m going to plow my life savings into this. I kid.

  4. Ev (near St. Louis, MO.) June 29, 2006 9:12 am

    Been enjoying your blog DividendGuy. Purchased WMT - 6/29/2005 @$47.61 - annual return currently 1.9% - not that great, however a good example of how dividends can protect us on the downside. Purchased 100 shares - have received 3 dividends and now have 101.016 - the stock has gained a tiny $93 - of that amt. $46.09 was from price appreciation and $46.91 came from dividends. Without the dividends my increase would have been cut in half. My philosophy and process is similiar to yours - I use the NAIC - Stock Selection Guide software. It looks as though you are using the Canadian version of the software? I as you assess for a quality company that can be purchased at a reasonable price - the dividend is an added bonus that provides a measure of safety.
    Keep up the good work DividendGuy.

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